Falling Commodity Prices To Hit Malaysia

Southeast Asian nation Malaysia’s economy is struggling after the regions major commodity exporter continued to suffer from falling global commodity prices.

Several economists have in recent weeks flagged their concerns over the potential negative impact the current trend, if prolonged, could have on the country, which relies on oil for revenue and a wide range of other commodities such as crude palm oil for export earnings.

They note that Malaysia, as a major commodity exporter, could likely see lower export earnings under the present environment and this could add pressure on the country’s current account.

At present, major commodities that concern Malaysia, such as crude oil and crude palm oil, are hovering at their four-year lows.

The prices of crude palm oil are already weak at RM2,171 per tonne as of Thursday, compared with the year’s peak of RM2,901 per tonne on March 10.

For Budget 2015, the Malaysian Government has allocated RM37.7bil for total subsidies, of which fuel accounts for a major portion based on its expectation that the Brent crude oil price would average at US$100 per barrel next year.

“Hence, in this scenario, even if the government were to restrict the supply of subsidised fuels to lower income households, it should have negligible impact on headline inflation,” it adds.

Meanwhile, CIMB Economics Research argues that falling oil prices may not be all bad for Malaysia’s economy. The institution points Malaysia can benefit from the recent fall in global oil prices, particularly if global demand is aided by higher discretionary incomes, which then feed into export demand.

While CIMB Research acknowledged that Malaysia’s government oil revenue would be affected by weaker global oil prices, it argues that there would not be a real risk to the fiscal deficit target of 3 per cent of GDP next year, given the stable dividends from Petronas.